Incoterms (international commercial terms) provide a universal set of rules and guidelines that help facilitate international trade. Incoterms rules provide specific guidance to individuals participating in the import and export of global trade and they are is widely used for international sales contracts.
This widespread use is due to the fact that Incoterms fix important legal and commercial issues of the actual execution of the foreign trade contracts of purchase and transaction; including the moment and place of performance of duties, transfer of risks, etc. Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers.
To identify and interpret the basic terms of delivery, one need to refer to the relevant provisions of the corresponding edition of Incoterms. Consequently, the rules of Incoterms will be valid if there is a corresponding clause in the contract. If the terms of Incoterms and the contract do not match, the latter is given priority.
On September 10, 2019, the International Chamber of Commerce (ICC) released Incoterms 2020 - the latest version of the rules for the interpretation of international trade terms. The Incoterms rules were first published in 1936 and were periodically revised as the international trading system developed.
The new version reflects recent changes in the practice of international supply of goods and is intended to provide greater clarity in the distribution of responsibilities for importers and exporters. In addition, the introduction to Incoterms 2020 contains more detailed explanations for choosing the most appropriate Incoterms rule in a particular situation.
Even though the earlier versions of Incoterms can still be used, the new Incoterms 2020 rules are more adapted to the new market trends and therefore more profitable for business.
The most important innovations
a. The content of each term is defined clearly with Explanatory Notes for Users
Incoterms 2020 enables parties to choose the best option that suits their interests by defining the content of each term more clearly.
Each Incoterms 2020 rule now contains "Explanatory Notes for Users", which much more extensively set out explanatory notes with illustrations of the corresponding Incoterms delivery condition, in particular:
- When this rule should be used;
- When the risk passes;
- How expenses are allocated.
The Explanatory Notes are intended to help users select the most appropriate Incoterms and provide guidance on interpretation in the event of disputes.
b. Assessment of the Bill of Lading as FCA Delivery Method:
The delivery term FCA Incoterms 2020 (Free Carrier) is the most common Incoterms rule; about 40% of international commercial transactions are carried out with this trade term. According to the new rule for FCA now the parties can agree that the buyer must instruct the carrier to issue a transport document to the seller at the buyer's expense that the goods have been loaded. If there is an agreement on this, the seller is obliged to provide the documents of the transaction to the buyer.
The FOB clause is mostly used for container shipping. As a result, the seller was at significant risk as he lost control of the container after it was delivered to the port. However, he was still responsible for the loss or damage to the cargo before the container was loaded on board. The solution to this problem for the seller would be to use the FCA condition. However, sellers wanted to secure the payment with a letter of credit. Letters of credit often require the submission of an appropriate bill of lading, but the seller using the FCA condition had little prospect of receiving it. The solution to this problem was to amend the FCA condition, according to which now the parties can agree that the buyer should instruct the carrier to issue the bill of lading to the seller.
c. Innovations brought to CIP and CIF
According to the CIP term in Incoterms 2020, the seller is obliged to insure the goods against all risks, not limited to the risks of fire or explosion, sinking, overturning of the vessel or grounding, its collision with an external object, unloading of the vessel in the port of distress. Here, in turn, a lower level of insurance coverage is optional and, if desired, additionally agreed by the parties to the transaction.
Changes to Incoterms are motivated by the fact that in practice the term CIF was usually used for sea transportation of bulk cargo with a low cost per unit of goods. Insurance with maximum coverage was not advisable due to the strong influence of insurance costs on the final price of the goods. The term CIP, in turn, was often used to deliver industrial goods with the feasibility of a higher level of insurance coverage.
d. Change of the abbreviation of DAT (Delivered at Terminal) to DPU
DAT (Delivery at Terminal) was renamed to DPU (Delivery at Place Unloaded). The term was modified and the term "terminal" was removed from the abbreviation to emphasize that delivery can be made anywhere as the abbreviation DAT means delivery can only be made at the terminal. If the destination is not a terminal, the seller must ensure that the place where he intends to deliver the goods is the place where unloading of the goods is possible.
e. Changes added to FCA, DAP, DPU and DDP
Carriage by own transport under the terms of FCA, DAP, DPU (formerly DAT) and DDP is now openly provided. According to the rules of Incoterms 2010, it was assumed that a third party carrier would transport the goods, however, in practice, the buyer or seller organized the transportation by their own transport; this practice was reflected in the new rules.
f. Safety requirements
Transport safety has become more closely regulated and has been added as a new regulation. Now Article A4 / B4 ("Carriage") of each Incoterms rule requires the seller to comply with any transport safety requirements to the point of delivery or provide the buyer with any information regarding transport safety requirements that the buyer needs to arrange transport.
Also, Article A7 / B7 (Export / Import Customs Clearance) now requires the seller to complete any security-related export clearance formalities and assist the buyer in obtaining any documents or information required to comply with import or transit customs formalities. Security costs associated with transport have been identified in a separate list of expenditure commitments under Articles A9 / B9 of each Incoterms rule.
Points to be considered
When referring to the terms of delivery in the contract according to specific Incoterms rules, the year of the rules should be clearly indicated. It will remove unnecessary doubts about which version of the rules was used and what is the responsibility of the seller and the buyer.
In order to neutralize the risks and unambiguously interpret the obligations of the parties in the contract, it is worth specifying as clear as possible the port, place, point, depending on the circumstances, in the selected Incoterms 2020 rules.
The adoption of the new rules of international trade Incoterms 2020 will inevitably also be reflected in judicial practice. In the foreseeable future, we will have the opportunity to analyze lawsuits in which the already changed rules of Incoterms 2020 will appear.
In conclusion, it should be mentioned that the awareness of entrepreneurs about the practice of using Incoterms will eliminate subsequent difficulties associated with the execution of contracts or the resolution of disputes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
